Software Equity Group Sees Improving Valuations, M&A Activity, in Software Sector

5/3/11Follow @bvbigelow

There were 394 software buyouts and mergers around the world during the first three months of 2011, with the cumulative value of all deals totaling $8.3 billion, according to a M&A tracking report from the San Diego-based Software Equity Group.

That was down from the 421 M&A deals that amounted to a total value of $12.7 billion during the previous quarter. But the total value of M&A activity during the first quarter was an improvement compared to the first quarter of 2010, when the Software Equity Group counted 431 transactions and a cumulative total of just $4.6 billion. Average valuations were roughly twice as high, year-over-year, while the number of deals was nearly 8.6 percent lower.

The firm’s quarterly software industry equity report is viewed as a key barometer for global M&A activity by some industry investors who closely follow company valuations. The quarterly report, which can be downloaded for free, is put together by the Software Equity Group, a boutique investment-banking firm and M&A advisory serving the software and technology sectors. The firm also prepares a more comprehensive annual report, which costs almost $600 per copy.

The quarterly report includes indexes that track the value of public software companies, public Internet companies (so it doesn’t include Facebook), and public software-as-a-service companies. The median valuation of public software companies during the first quarter was 2.7 times trailing 12-month revenue—the sixth consecutive quarter that the median valuation of all companies in the index has been at or above two times 12 months revenue, according to Brad Weekes, a Software Equity Group associate.

Some other highlights that Weekes points out:

—Trailing 12-month revenue growth for the overall index during the first quarter was 13.5 percent—the highest growth rate since the fourth quarter of 2007.

—EBITDA margins, which the financial industry defines as Earnings Before Interest, Taxes, Depreciation and Amortization, edged down slightly to 18.8 percent as public software companies reinvested in sales, marketing, and operations to capitalize on growth opportunities of the improving economy.

—The median valuation of public software-as-a-service companies was 4.8 times trailing 12-month revenue—the highest median valuation among SaaS companies since the second quarter of 2008. The median growth rate for trailing 12-month revenue among SaaS companies jumped to 19.6 percent in the first quarter, from 16.7 percent in the fourth quarter of 2010.

—Among public Internet companies, the median valuation was 2.8 times trailing 12-month revenue during the first quarter. It was the second consecutive quarter that the median valuation of Internet companies has exceeded the multiple for all public software companies. “We believe this differential will continue and grow for the next four quarters, as investors continue to shift their attention from public on-premise software companies to public Internet and SaaS providers,” Weekes said.

—Internet companies in the Software Equity Group’s Internet Index closed the first quarter with a 21.5 percent median rate of revenue growth. The median EBITDA margin for public Internet companies was 18.1 percent during the quarter, just slightly below the 18.8 percent median EBITDA margin of public software companies, but well above the 10.2 percent median EBITDA of public SaaS companies.

Enterprise Value (EV) is defined as a company’s capitalization minus cash and short-term investments, plus total debt, preferred equity, and total minority interest. TTM is trailing twelve-month revenue. EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization.

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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